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How to be debt-free in 2022

DON’T WAIT TO PAY DOWN WHAT YOU OWE — FOR YOUR OWN PEACE OF MIND

By Dennis McCarron

It’s been a crazy two years. Here in the United States, most independent tire dealerships survived the lows of the pandemic and lockdowns. And many that survived had an increase in sales

One of the most common themes in the conversations I had with tire dealers across the nation in 2021 was “banking your profits.”

It can be very tempting during a difficult period to come out financially on the plus side and think, “I’ve worked especially hard, so I deserve to reward myself.”

Yet here I am going to advise you to hold off.

If your business holds any significant debt — other than maybe your original loan — I strongly suggest you use last year’s windfall to pay down debt.

And if you’re using credit to purchase tires and parts and not paying it off every month, you really need to start putting money into servicing your company’s debt.

The main reasons I urge this are related to your mental health and to help you get through any rough patches in business that are likely to hit in the next 12 months.

Financial stress from owning a business is one of the main causes of health problems in small business owners.

No one else understands the weight of having to make payroll every week.

Not many understand the pressure of signing a loan for close to or more than $1 million.

That stress affects the way you think, your personal relationships, your sleep and more.

Bottom line? It’s unhealthy.

From the financial side, it’s very likely interest rates are going to start going up in 2022.

Now is the time to reduce debt — not a year from now. Here’s why. The worst-case scenario is that you’re on credit for inventory and not paying the bill on time.

This usually means you have an additional loan or access to credit to help get through “the slow months.”

Most banks will consider you tapped out at this point as far as extending more credit, so the people willing to give you credit will do so at very painful rates.

An additional problem is that if inventory is on credit where interest is paid, the owner is likely not including the interest in the cost, so expenses

Now is the time to reduce debt — not a year from now.

are creeping upward and net profit is dwindling.

In this case, some drastic measures need to take place, as this is unsustainable.

A whole lot of change needs to happen quickly.

You won’t have access to anyone else’s money, so you typically must create it yourself.

Raise prices, sell off inventory for cash, skinny down all non-essential expenses and take a big personal paycheck hit.

The next-to-best case scenario is that you have some debt — typically related to leasing equipment, a recent remodel or any other major expense that doesn’t occur commonly — or you have some old debt related to getting your business up and running.

I strongly recommend that you take some of your windfall from 2021 and pay a portion off or eliminate that debt completely.

It will feel good. But how much should you pay?

Make sure you pay down at least enough to make a bank look at you as a safe bet to lend money.

One of the first financial items a bank will look at is your “current ratio.”

Your current ratio is how much in current assets — items that can turn to cash in 12 months, like inventory — you have against your current liabilities, which are items of debt that are to be paid in a 12-month period.

You should have $2 in current assets to every $1 in current liability.

This tells a bank you have the ability to create an excellent stream of cash and are not tied down with a lot of short-term debt.

This information is available on your balance sheet. If you need help understanding this more, your accountant can assist.

And believe it or not, YouTube is a great resource for educational content.

Just make sure the content provider knows what he or she is talking about before you decide to act on any of their advice.

What you don’t want to do is to pay down so much debt that you are again cash-strapped and must get another loan.

If you are in this scenario, make sure there is about two to three months of cash in your bank. The rest can go towards paying down debt.

The best-case scenario is that you have no debt — not even a mortgage. Congratulations! You have reached tire dealership nirvana!

Hand out some performance-based bonuses to the people in your shop, give some merit raises where due and go ahead and buy that “little” reward you deserve. ■

Decoding the value of D2C

WHY DIRECT-TO-CONSUMER BUSINESSES ARE FETCHING TOP DOLLAR

By Michael McGregor

Stuff rolls downhill. I use this phrase when explaining to clients how analyzing the values of larger public and private companies in the marketplace can give them a relative sense for how their smaller business might be valued.

But increasingly, we all need to be looking at how the impact of new entrants or new combinations may change valuations in the future.

When we get a new client looking to exit their business, we try to give them our sense for the value of their business so we are aligned with their expectations.

The way we do this is by looking at the publicly traded companies in their space and then finding recent, comparable sales. We look at the public companies that are doing what the client does, but on a much larger scale.

For example, with auto parts manufacturing clients, we look at 40 public companies, such as Borg Warner, Lear Corp. Tenneco and Dana Corp. We look at low and high EBITDA multiples, but in particular, we focus on the mean and median midpoints, which are hovering now at around eight times to 10 times EBITDA.

For tire and service retail clients, we start with Monro Inc., which is the most visible publicly traded company in this space. As of this writing, it traded at 15.3 times EBITDA. That’s a pretty good upper end for all smaller retail tire dealers to be measuring their lower value against.

Now besides Monro, there’s not much else to compare against, except for what we know of in our own transactions or hear in the market.

We assume that some of these recent big deals — like when Mavis Tire, with more than 1,000 stores, traded hands to a new private equity buyer — were either in that same range, but possibly higher.

We heard that when Driven Brands last traded hands a few years back, it might have been at a 12 times EBITDA multiple, so I tend to still use that as the low end for the large companies. Anyway, for large companies in tire retail and service, let’s say the range is 12 times to 15 times-plus EBITDA and more.

For automotive e-commerce clients, we look at 50 public companies, like 1-800-Flowers.com, Amazon, eBay, CarParts. com, Parts ID and others. These 50 companies have mean and median values of 27 times to 34 times EBITDA.

All of this helps owners understand where they may fit in the value range.

If you are a $12 million auto exhaust manufacturer, you’re going to trade for about a three times to five times EBITDA multiple because the median public companies are only eight times to 10 times EBITDA.

If you are a six-store chain of tire stores, you’re going to trade for maybe five times to seven times, depending on the appetite of the buyers and your level of profitability, among other things.

And if you are an automotive e-commerce company with $60 million revenue and a good brand, you might be looking at a nine times to 10 times EBITDA or a higher, double-digit multiple.

Now paying attention to how public and large private companies’ valuations change over time will also let you know what the trend is within your category of business. For example, in May 2016, Monro was trading at the same multiple it is today — 15 times EBITDA. Knowing this signals that valuations overall have remained steady and strong for retail tire dealers. Had they been 12 times EBITDA in 2016, one would say valuations have been growing.

But how do you read the tea leaves about future valuations? Look at what else the information above is telling us. Oldeconomy auto parts manufacturers with capital intensive, internal combustion engine-focused (ICE), two-step and three-step distribution businesses are valued pretty low.

Tire and auto service retailers that install some of these parts — but control the customer experience in their physical stores — are valued much better.

But virtual, internet-based companies that sell direct to the consumer are valued the highest. It’s like looking at the past, the present and the future right there.

And that’s how new business models can be valued much higher than older public companies in the same industry. The market is predicting that things are going in a particular direction.

That’s why Tesla is seemingly worth more than all of the Detroit auto companies combined. That’s why Warby Parker, the online eyewear company, trades at 10 times revenue – not EBITDA. With sales of $500 million, Warby Parker is worth $5 billion. And that’s why Allbirds, the online shoe company, trades at nine times revenue. Allbirds is worth $2 billion on sales of $260 million.

While Tesla is obviously about the shift from ICE to electric vehicles, it’s also partly about selling direct to the consumer (D2C).

The market is saying brands that operate as retailers — controlling both the customer experience and the customer relationship — trade at much higher values than other companies.

But more than that, these companies have the right sort of positive customer experiences that build brand reputations,